UBS Suffers Setback as Lawmakers Vote for Higher Capital

(Bloomberg) — Swiss lawmakers handed a defeat to UBS Group AG executives on Wednesday, voting decisively in favor of a plan that could ultimately force the global wealth manager to hold billions of dollars in extra capital.

The upper house of Switzerland’s parliament voted 29 to 16 for an amendment to the government’s draft bill on regulatory reform that requires the bank to back its foreign units with high-quality equity capital up to 90% of their value.

That’s a minor tweak to the original plan of 100% backing, and an interim victory for Swiss Finance Minister Karin Keller-Sutter, who has battled for two years to force the nation’s largest lender to ensure that its businesses abroad can be sold off safely in a crisis. UBS Chief Executive Officer Sergio Ermotti and Chairman Colm Kelleher had rejected the 90% proposal, and put their weight behind an alternative plan involving much higher use of convertible debt to meet the same objective.

With the so-called AT1 compromise now effectively dead, UBS faces a less favorable parliamentary process including the bill’s passage through the more left-leaning lower house. A final decision isn’t likely before 2027, and the decision could yet be put before the public in a plebiscite.

Switzerland has been struggling to find a way to make its sole global bank crisis-proof since the collapse of Credit Suisse in 2023, with the government’s approach consistently centering on the substantial increase in equity capital. UBS executives have pushed strongly against that, arguing it will make them uncompetitive against global peers.

UBS shares were broadly unchanged in Zurich. The extended uncertainty over higher capital requirements — which crimp a bank’s ability to pay out to investors as well as its room to pay bonuses — has weighed on the share price over the past couple of years. While the stock is up about 10% this year, an index of European peers has seen a more-than 20% gain.

The demise of the potential AT1 plan — and the associated extra issuance of the debt — drove existing UBS bonds higher on Wednesday. The debt, the riskiest kind a bank can issue, rose as much as 0.3 cents to 98.36 cents after the vote, according to indicative prices compiled by Bloomberg.

Keller-Sutter delivered an extended speech to lawmakers before the vote, comprehensively countering arguments that UBS and its supporters in parliament had made against the government’s plans. In the end, lawmakers voted for a measure more similar to her initial proposals than what UBS wanted.

“UBS does not deny that it has the necessary funds for this capital build-up,” Keller-Sutter said. The question is whether it uses the funds “to strengthen the Swiss parent bank, as the Federal Council wants. Or in favor of shareholders in the form of dividend payouts and buybacks of shares.”

The government plan of 100% capital backing was widely estimated to be the most onerous for UBS, while the AT1 plan was seen as the least costly one, although the latter also entailed an increase of requirements.

Switzerland’s current banking rules require 60% backing of foreign units, a quarter of which can be covered with AT1s. The government said that this proved insufficient during Credit Suisse’s demise almost four years ago.

UBS Frustrated

In various public statements over recent days, UBS Chief Executive Officer Sergio Ermotti and Chairman Colm Kelleher warned lawmakers against adopting the government’s proposal.

The bank had taken a position against the 90% solution, describing it in a position paper on Monday as “not a compromise” and an approach that “would significantly damage UBS’s competitiveness.” The bank — having taken no stance on its preferred outcome before the last few days — finally supported the AT1 proposal as being “the way to go.”

Analysts at Goldman Sachs Group Inc. and Citigroup Inc. put the likely amount of extra capital requirements at $17 billion as a result of the 90% rule.

“This is a more onerous outcome compared with the compromises that had recently been discussed in parliament,” analysts at Goldman led by Chris Hallam said.

UBS bought Credit Suisse in an emergency deal in early 2023 that was engineered by the government. The bank’s leaders have expressed a sense of frustration that Bern since then has sought to impose higher capital requirements on it.

Keller-Sutter has said her plan would ensure that UBS stays resilient in a potential crisis, shielding Switzerland from a scenario in which its largest bank by far could spiral toward collapse. She has dismissed the idea that AT1 bonds can be used to substitute CET1 capital in this context, due to broad doubts about their application in crisis scenarios.

The result will now be passed on to the lower house, which will potentially debate it at the end of the year, and take its own stance. If the chambers disagree on details, the two bodies will start passing the bill back and forth in search of a common version.

A final ruling on UBS’s capital requirements isn’t likely until 2027 at the earliest and the decision could also go to a plebiscite.

The vote may also spur fresh speculation about UBS’ future. Options theoretically on the table range from the dramatic — a merger or acquisition deal with a non-Swiss bank allowing a change in domicile and escape from the oncoming rules — to the more mundane, such as a range of technical tweaks that can put just enough capital away over the coming years.

–With assistance from Isabel Demetz, Noele Illien, Myriam Balezou, Levin Stamm, Jan-Henrik Förster and Esteban Duarte.

(Adds analysts’ comments)

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